Kyle Stanford June 10, 2016
PitchBook recently interviewed Venrock partner Brian Ascher about all things fintech, covering how companies will compete with large banks, future growth prospects for an already booming industry and much more.
The financial services sector is enormous and spans a variety of trillion and multi-hundred billion dollar markets from mortgages and loans, to investments, payments, insurance, and several others. Finance is an intangible concept so well suited to digital technology, yet traditionally financial services have been delivered through massive brick and mortar networks with armies of people and paper intensive processes. Fintech can provide financial services more efficiently through direct to consumer online channels as well as remove the expensive middlemen that take a heavy toll in terms of fees and commissions ultimately born by the consumers, whether those consumers realize it or not. This increased efficiency and transparency means the elimination of mispricing so that consumers pay fairer prices for better services and results, a major reason why online lending and digital wealth management have exploded over the last five years. Cost and waste comes out of the system and benefits both the consumer and the disruptor.
Financial service markets are generally not winner-take-all (or even “most”) the way they are in social networks, search, or eCommerce. I think we will see some huge fintech companies created that will thrive as large independent companies. But traditional banks, investment companies, and insurance carriers are not going away; instead they are already starting to adapt to the digital consumer and are experimenting with new delivery models to attract Millennial customers. There are also plenty of software companies that want to sell white label technology to financial institutions, and there are FIs that will build good solutions in-house. And of course the incumbents will continue to acquire startups for the teams, skillsets and technology. I believe we will also see more hybrid offerings that blend digital offerings with human service advisors to provide the consumer with the best of both worlds. A great example of melding digital tools with more traditional human interaction is Personal Capital, a Venrock portfolio company. They have found a way to scale the provision of dedicated advisors to clients when they want them, but also give those clients and massive numbers of free users best in class digital tools to stay on track with their personal financial management.
Fintech entrepreneurs need a blend of the maverick disruptor mentality balanced with an appreciation for the regulatory compliance, security requirements, transparency and privacy requirements that goes along with handling people’s money. Fintech entrepreneurs often come from outside the financial industry but hire industry expertise into key roles. Other things we look for are a clear business model, ideally one that corrects a mispricing in the market and offers a very different value proposition, and brand experience versus the incumbent FIs.
We are already seeing VC investments in fintech cool down a bit, especially in online lending where cheap loan capital has become more scarce, consumer acquisition costs have risen due to the huge number of startups funded over the past few years, and there is a sense that the big winners are already out on the field. Investment Management (aka Robo Advisors) may be next in this progression. Insurance is getting a lot of VC investment right now. I still believe that we are early in terms of consumer adoption of fintech and there is massive growth ahead for the industry as a whole.
It’s not just the SEC, but also Federal bank regulators, state regulators, the CFPB (Consumer Financial Protection Bureau), and a host of others. They certainly have their hands full with the sheer number of companies that are emerging and the pace of innovation, but there is plenty of scrutiny. Enough penalties have been levied and examples made that entrepreneurs are generally investing in compliance and seeking to play by the rules. These are very complex operations and rules, so inevitably there will be minor non-compliance incidents here and there, but I don’t see systemic intentional violations nor a lack of oversight.
The biggest breaches that have come to light have been across a wide range of traditional retailers, legacy financial institutions, and even large public internet companies. The reality is that fintech startups are not the juiciest targets since they are tiny compared to incumbent FIs. I think security is an issue that every single company has to contend with, even if you are a mostly brick and mortar retailer that accepts credit cards. Fintech startups need to build trusted brands to overcome cybersecurity fears, but also just to get consumers to trust that they are legitimate companies that will provide good service at fair and transparent prices.
Brian Ascher joined Venrock in 1998 as a Kauffman Fellow and is currently a partner based in Venrock's Palo Alto office. Brian invests broadly across enterprise and consumer internet markets. He currently serves on the board of directors of several companies, including Vocera (NYSE: VCRA), Better Finance, Retail Solutions, Inrix, Personal Capital and Dynamic Signal. Prior to Venrock, Brian was a senior product manager at Intuit responsible for Quicken and Quicken.com, and earlier in his career was a strategy consultant at Monitor Group. Brian has been named to the Forbes Midas List multiple times, for the VCs who have backed the most profitable winners in the last four years.